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Research Associate: Sheryl Fernandes
Contact: (022) 4303 4628 / 8879415031 Email: [email protected]
Key Highlights: f Indian domestic aviation sector – which clocked 18% CAGR over FY14-19 – was impacted in
FY20 and FY21 due to COVID-19 pandemic. Looking ahead, we expect overall air passenger traffic to record a phenomenal 30% CAGR over FY21-FY26E, due to low base and expected strong revival. Air passenger traffic growth has a strong co-relation with GDP growth with a 1.5x multiplier. With GDP growth expected at ~7% over a long-run, the aviation industry is expected to record double-digit growth of 12-13% over the next decade. We expect the industry to stage strong bounce-back in the post pandemic scenario on lower base. Therefore, we expect air passenger traffic to record 64% growth in FY22E followed by 76% and 9% growth in FY23E and FY24E, respectively.
f Average air fare/km, which fell by 11% over FY14-FY20, resulted in decline in average air fare – as a percentage of per capita – declining from 5.5% to 3% over FY14-FY20 leading to better affordability.
f Considering reducing differential between rail fare and air fare, massive shift from rail to air travel expected over next decade. This would also lead to steady improvement in pricing power.
f Over FY06-FY21, the LCCs gained market share by 24 percentage points (accounting for 85% of domestic aviation market in FY21), which supported increase in PLF of industry.
f Higher PLF and control on cost would expand operating margin of the aviation companies. Other cost control parameters like increasing block hours, reducing ownership cost/ASK by increasing owned aircrafts and introduction of new aircraft with more seats per aircraft and ~10-15% better fuel efficiency would drive their profitability.
ESG Analysis: Analyzing InterGlobe Aviation (INDIGO) and SpiceJet (SJET) on 20 key criteria under ESG Matrix, we have assigned an overall score of 68% and 62% to INDIGO and SJET, respectively. Under “Environmental Head”, we have assigned 54%/54% score to INDIGO/ SJET, as they emit radiation and consume conventional fuel, which pose a great danger to the environment. Under “Social Head”, we have assigned 73%/60% score to INDIGO/SJET. Under “Governance Head”, we have assigned 77%/73% score to INDIGO/SJET (please refer to page no. 5 for detailed ESG analysis).
Initiate Coverage on Aviation Sector with POSITIVE View
Considering strong revival from pandemic, rapidly increasing airfare (yield), likely healthy double-digit traffic growth for aviation sector over the next 5 years, margin expansion from current level, rising international base of Indian airline companies and valuation comfort, we initiate coverage on aviation sector with a positive view. We initiate coverage on INDIGO and SJET with BUY and 2-Year Target Price of Rs2,750 and Rs105, respectively. We prefer INDIGO, as it is the dominant player with the lowest cost/ASK in the industry and enjoys >50% market share currently. The stock currently trades at attractive valuation of 6.1x EV/EBITDAR FY24E.
Coverage Summary
Price Performance
IndiGo 760 4.2 15.0 55.6
SpiceJet 45 4.1 (6.2) 49.2
Aviation Sector Initiation | 4 October 2021Institutional Equity Research
Strong Bounce Back in Air Passenger Traffic - the Key Catalyst
Key Sectoral Tailwinds:
Air passenger traffic is expected to clock 30% CAGR over the next 5 years
Expected strong rebound in air passenger traffic in 2HFY22E post pandemic – the single biggest catalyst over near term
Low penetration and changing preference for travel are the key boosters
Rising affordability, focus on comfort and increasing tourism to fuel demand
Increasing market share of Low-Cost Carriers (LCCs) and better cost control to drive margin
Key Financials and Valuation Company Reco CMP* 2 Yr TP Up/ Revenue (Rs mn) EBITDAR (Rs mn) PAT (Rs mn) EV/EBITDAR (x)
(Rs) (Rs) (%) FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E
IndiGo BUY 1,975 2,750 39 1,46,406 2,11,272 4,10,977 5,54,920 2,550 (2,824) 89,630 1,57,990 (58,298) (63,335) 21,009 63,978 370.9 (351.8) 11.5 6.1
SpiceJet BUY 75 105 39 51,334 58,424 1,08,012 1,45,394 4,228 1,394 25,958 31,111 (9,983) (11,347) 3,299 4,230 32.2 86.6 5.1 3.9
Source: Company, RSec Research; Note: * CMP as on 1 October 2021
2
f Environmental Social Governance Matrix (ESGM) ............................................................................. 5
f Channel Check Takeaways ................................................................................................................ 6
f Comparative analysis ........................................................................................................................ 7
f Key Sectoral Dynamics – At a Glance ............................................................................................... 9-16
f Sensitivity Analysis (FY24) ................................................................................................................... 17
Company Section 18-55
InterGlobe Aviation ................................................................................................................................... 19-38
ffi c
f Air Passenger Traffic is Expected to Clock 30% CAGR over FY21-FY26E: Domestic air passenger traffic clocked 12% CAGR over FY10-20 on the back of opening up of economy, increasing business activities, availability of more routes and rising affordability. The recent change in consumer behaviour in terms of preference for comfort over cost benefit has been playing important role in tours and travel industry. Therefore, we expect air passenger traffic to record marginally better growth in next decade over the last decade. We expect domestic/international air passenger traffic to clock 28%/46% CAGR over FY21-FY26E. Accordingly, we estimate overall Indian aviation industry to clock 30% CAGR over FY21-FY26E due to low base led by pandemic-led disruptions. At a per capita level of US$4,000 (on PPP basis), the industry attains its inflection point based on historical trend observed in key global economies. India had already observed this inflection point in 2010 and accordingly recorded double-digit 11% CAGR in air passenger traffic over 2010-2020. Moreover, China’s per capita GDP was US$6,811 (on PPP basis) in 2007 (compared to India’s per capita GDP of US$6,997 (on PPP basis) in 2019), since then China’s air passenger traffic clocked 11% CAGR till 2019. Similarly, we see healthy air traffic growth over next decade in India.
f Domestic Aviation is Primarily an LCC Industry Now: The LCCs have been gaining market share in India over the years, which stood at 85% in FY21. Notably, their share improved from 60% in FY06 to 85% in FY21. Generally, they attract higher passengers due to low cost, which results into higher PLF. Thus, rising share of LCC transforms into higher PLF for the industry as well. PLF in domestic segment improved from 68% to 88% over FY06-FY20. Over the last five years, PLF of LCCs were 6.1% pts higher than for Full-Service Carriers (FSCs). Over a period, the LCCs have emerged as winners, while FSCs are finding tough to sail through. It is also implied that FSCs with business class is not profitable business franchise. We expect the LCCs’ market share to rise further over the next 2-3 years.
f Increasing Active Hours/Day to Drive Profitability: An aircraft, which is active for longer hours per day can generate proportionately higher sales and reduces ownership cost/ASK, providing cost advantage. Lease rent has fixed as well as variable component based on usage. The fixed component is ~60% for Indian aviation companies. Thus, an airline can reduce ownership cost/ASK by higher sweating of asset. Longer flights with addition of new international routes and reducing the time gap with proper planning slots at busy airports with concentrated operations can reduce downtime and improve active hours. This directly translates into profitability with proportionately higher revenue. Moreover, it also reduces fuel expenses by lowering idle flying due to airport traffic/congestion.
f LCCs Enjoy Lower Fuel Cost/ASK due to More Seats & Fuel-efficient Aircrafts: Fuel cost/ASK is broadly similar across 3 major airlines despite the cost of Aviation Turbine Fuel (ATF) for international airlines i.e. Air India is much lower than that of domestic airlines (INDIGO & SJET). The LCCs with only economy class have 20-25 more seats on the same aircraft than FSCs with additional business class, reducing fuel cost/ASK by ~11-15%. Moreover, recently these companies are replacing/adding new aircraft with better fuel-efficient engines (having 13-15% more fuel efficiency), which has direct positive impact on their profitability.
f Sharp rise in crude prices f Depreciation of INR f Slower-than-expected growth in air passenger traffic due to adverse macroeconomic scenario f Major disruption similar to COVID-led lockdown/restriction
Key Risks
Domestic Air Passenger Traffic Over a Decade International Air Passenger Traffic Over a Decade
54 61 58 61
0
20
40
60
80
100
120
140
160
180
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
(m n
23
5
12
24
27
0
5
10
15
20
25
30
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
(m n
4
Promoter's Holding Pledge 9 Low 2 High
Board of Directors Profile 8 Low 6 Low
Industry Growth 8 Low 8 Low
Regulatory Environment / Risk 3 High 3 High
Entry Barriers / Competition 7 Low 6 Low
New Business/Client Potential 7 Low 8 Low
Business Diversification 6 Low 8 Low
Market Share Potential 9 Low 7 Low
Margin Expansion Potential 7 Low 8 Low
Earning Growth 8 Low 8 Low
Balance Sheet Strength 3 High 2 High
Debt Profile 2 High 1 HIgh
FCF Generation 3 High 2 High
Dividend Policy 1 High 1 High
Total Score Out of 150 88 76
Total Score (%) 59% Low 51% Low
Investment Decision Matrix (IDM)
Score Risk Score Risk
Air & Water Pollution 3 High 4 High
Biodiversity 6 Low 6 Low
Deforestation 2 High 2 High
Energy Efficiency 7 Low 6 Low
Waste Management 6 Low 6 Low
Defence / Arms / Ammunition Exposure 10 Low 10 Low
Social
Data Protection & Privacy 8 Low 8 Low
Gender & Diversity 8 Low 8 Low
Employee Engagement 7 Low 7 Low
Community Relations / Service 6 Low 4 High
Human Rights 7 Low 6 Low
Labor Standard 6 Low 3 High
Governance
Bribery & Corruption 8 Low 7 Low
Executive Compensation 9 Low 7 Low
Lobbying 9 Low 9 Low
Political Contribution 8 Low 8 Low
Whistleblower Schemes 8 Low 8 Low
Total Score Out of 200 136 124
Total Score (%) 68% Low 62% Low
6
Channel Check Takeaways
We had a series of discussions/interactions with several industry experts and few stakeholders including travel agents, tour operators and online travel booking companies.
f During the last one and a half months, overall enquiry level has gone up significantly (up 100% from Apr-May level), though it is 20% below Nov’20-Feb’21 level. Whilst the demand situation is improving gradually, it is still 20% lower than pre-COVID level.
f Business travel is also steadily picking up albeit at lower pace compared to pre-COVID level. Currently, business travel form just 25-30% of normal level, which the industry experts expect to increase to 40-50% in 2HFY22E with increasing vaccination drive. However, it may not reach the previous peak level in next 1-2 years, due to change in work structure amid work from home (WFH) concept at present.
f Demand for leisure travels through airways is expected to grow significantly over the next 5 years, as the price gap between air travel and III-tier AC ticket has narrowed down. Moreover, consumer aspiration and affordability have been driving the demand for air travel since last 3-4 years.
f Limited railway ticket availability during the peak seasons and hassles in booking tickets have been driving the demand for air travel for the customers in Tier-I/II cities. Notably, the recent pick-up in demand (excluding COVID period) emanated from Tier- III/IV cities.
f Strong up-tick in travels is expected in next 1 year, as the consumers appear to be desperate for travel after being at home for over 1 year in depressing environment along with rapid vaccination coverage. Sudden spurt in demand may result in capacity constraint for few routes in 2HFY22, which is expected to aid the pricing power of these players.
f Overall air passenger traffic should grow in double-digit over the long-term in line with the historical trend.
7
Business
IndiGo is India’s largest passenger airline with a domestic market share of 53% (based on RPK) as of FY21-end. It primarily operates in India’s domestic air travel market as an LCC with focus on three pillars: (1) low fares; (2) on-time services; (3) courteous and hassle-free experience.
SpiceJet is India’s one of the preferred low-cost airline making flying affordable. It offers various customer services, loyalty programmes and value-added services. It is India’s largest cargo operator and largest passenger airline in terms of regional connectivity. It also operates as an LCC.
Go First is an LCC with affordable airfares. It operates business on three basic principles: (1) punctuality; (2) affordability; and (3) convenience. Go First is positioned as “the Smart People's Airline”. Its network is spread across major cities in India and overseas.
Year of Commencement 4th August 2006 18th May 2005 4th November 2005
Business Revenue Break-up (FY20)
f Passenger: Rs338.4bn f Ancillary (Cargo): Rs10.4bn f Ancillary (Non-Cargo):
Rs4.8bn f Others: Rs3.9bn
f Passenger: Rs61.9bn f Ancillary (Cargo): Rs1.2bn f Ancillary (Non-Cargo):
Rs3.9bn f Others: Rs3.4bn
Fleet Size
It had a peak fleet of 287 as of 3QFY21. However, due to pandemic, it declined to 277 in 1QFY22 including 122 A320 NEOs, 85 A320 CEOs, 29 ATRs and 41 A321 NEOs.
Fleet comprises of 113 aircrafts including 81 Boeing 737 and Max, 32 Q400 as of 31st March 2020. Overall fleet strength reduced to <50 currently due to ongoing pandemic.
Fleet comprises of 56 Airbus A320 aircraft as of FY20. Latest details not available.
Routes Operated (as of 31st March 2020)
86 (62 domestic and 24 international)
Passenger: 57 (47 domestic and 10 international) Cargo: 107 (63 domestic and 44 international)
39 destinations (29 domestic and 10 international)
Domestic Market Share – based on RPK (FY21)
53% 14% 8%
Management Quality
Most capable management in terms of decision making and handling pandemic wisely. Maintained consistency in performance to greater extent.
Good quality management to handle tough situation but it lacks consistent performance.
Good quality management to handle pandemic with decent business performance over the years.
Comparative Analysis
FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20
Revenue 2,30,209 2,84,968 3,57,560 77,557 91,133 1,23,586 44,770 57,887 70,516
EBITDA 29,565 (2,054) 40,382 7,575 (99) 4,965 10,243 9,420 3,392
EBITDAR 65,667 36,556 45,348 17,896 12,869 8,594 10,243 9,494 4,080
PBT 31,267 (1,490) (2,751) 5,667 (3,161) (9,347) (371) (7,179) (18,769)
PAT 22,424 1,561 (2,482) 5,667 (3,161) (9,348) (312) (3,866) (12,707)
Growth (%)
Revenue 23.9 23.8 25.5 25.3 17.5 35.6 NA 29.3 21.8
EBITDA 37.9 NA NA 39.7 NA NA NA (8.0) (64.0)
EBITDAR 24.6 (44.3) 24.1 19.1 (28.1) (33.2) NA (7.3) (57.0)
PBT 45.8 NA NA 60.2 NA NA NA NA NA
PAT 35.1 (93.0) NA 60.2 NA NA NA NA NA
Margin (%)
EBITDAR Margin 28.5 12.8 12.7 23.1 14.1 7.0 22.9 16.4 5.8
NPM 9.7 0.5 (0.7) 7.31 (3.5) (7.6) (0.7) (6.7) (18.0)
Source: Company, Note: We have not included FY21 financials as the numbers were distorted due to pandemic; NA: Not Applicable
8
Sector At a Glance
Key Charts Exhibit 1: Domestic and International Air Passenger Traffic Growth over the Years
Source: DGCA
Exhibit 2: Air Passenger Traffic growth vs. GDP Growth & GDP Per Capita growth
Source: DGCA, World Bank
Exhibit 3: Domestic Aviation Market Shares over the Years (Based on RPK)
Source: DGCA
Exhibit 4: Brent Crude vs. Indian ATF Prices & Fuel Cost/ASK of INDIGO and SJET
Source: Company, RSec Research
f Air passenger traffic clocked 11% CAGR over FY10-20 on the back of opening up of economy, increasing business activities, availability of more routes and rising affordability. Looking ahead, we expect overall air passenger traffic to record a phenomenal 30% CAGR over FY21-FY26E, due to low base and expected strong revival.
f Air passenger traffic growth has a strong co-relation with GDP growth with a 1.5x multiplier. With GDP growth expected at ~7% over a long-run, the aviation industry is expected to record double-digit growth of 12-13% over the next decade.
Exhibit 5: PAT of INDIGO & SJET over the Last 10 Years
Source: Company, RSec Research
f Higher market share gain helps the companies on margin and profitability front. We believe that INDIGO would outpace the industry growth on the back of market share gain and higher growth in international segment.
f Crude price movement has high bearings on CASK and profitability of airlines
f INDIGO was consistently profitable till FY19 while in FY20 and FY21 its profitability was impacted due to pandemic
(80,000)
(60,000)
(40,000)
(20,000)
0
20,000
40,000
60,000
80,000
(100)
(50)
FY 10
FY 11
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17
FY 18
FY 19
FY 20
FY 21
FY 22
(30)
(20)
(10)
GDP Per Capita growth GDP growth Aviation Traffic growth
20 23 30 33 37 40 42 41 43 48 5316 17 20 19 15 11 12 12 12
16 14
8 8 9 9
6 7
11 10
1 1
0
20
40
60
80
100
120
(% )
Indigo Spice jet Go First Vistara Air Asia Air India Others
0.0
0.5
1.0
1.5
2.0
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
(R s)
(R s/
9
1. Extremely Low Penetration of India’s Domestic Aviation – The Biggest Growth Driver
Over FY14-20, India’s domestic aviation sector clocked 15% CAGR, which was significantly faster than the most other consumer segments like FMCG, commercial vehicle/passenger vehicle/two-wheeler, railways/road freight and railway passenger segments. Over the next decade, we expect growth rate for India’s domestic aviation industry to be faster compared to last 5 years due to low base. Current penetration of air passenger traffic stands at just ~2% of total population, which is just 4% of rail traffic. Moreover, this penetration of air passenger traffic of 2% is much lower than several developed nations i.e. the US (55%), the UK (42%), China (9%) and Japan (21%) etc. We believe that such low penetration along with rising consumer aspiration owing to improved affordability is the single biggest trigger for the aviation industry over the next 10 years. We expect the domestic air passenger traffic to record 12-13% CAGR over FY20-FY30E. This would translate into 6.5% of penetration by FY30-end, which is still below most other developed countries (assuming 1% annual population growth). At present, we estimate that just <10% of India’s urban population uses air transport, which provides significant opportunity for growth.
In FY20, 141mn domestic air tickets were sold in India. Assuming every trip requires 2 tickets (including return), translates to 70.5mn trips. Assuming 2.5 trips per traveler, we arrive at 28.2mn people used air transport in FY20. This is just 2% of India’s population (1.4bn in 2020) and 6% of urban population (0.48bn in 2020)
While the recent pandemic-led slowdown has impacted air passenger traffic in FY21, we believe this is a temporary phenomenon/aberration and expect the passenger traffic to rebound with the recovery in GDP growth.
We observed direct co-relation between GDP and GDP per capita and air passenger traffic in all key global economies. Among the various growing economies, China is good example to compare in terms of comparable GDP per capita and population. China’s passenger traffic clocked 13% CAGR over last 2 decades (CY2000-CY2019), when base year GDP per capita (on PPP basis) was US$2,921 for China. Comparable GDP per capita for India was witnessed in 2006 when penetration was almost half than that of China. Even assuming penetration to remain 65% of China’s current penetration in next 10 years, it would lead to 12.5% CAGR in Indian air passenger traffic over FY20-FY30E.
Potential for Indian Aviation over the Next Decade: Over CY06-18, China’s domestic aviation clocked 12% CAGR (1.4x GDP growth rate). We believe that similar growth rate in aviation traffic in India is possible in the coming decade, which is albeit contingent upon strong GDP growth.
Key Sectoral Dynamics – At a Glance I. Extremely Low Penetration of India’s Domestic…

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